Bootstrapping

Definition:To finance your company's startup and growth with the assistance of or input from others

Anyone who's started a business on a shoestring is adept at
bootstrapping, or stretching resources--both financial and
otherwise--as far as they can. But bootstrapping isn't limited to
the startup state. It's a valid way for business owners to treat
valuable resources at any stage of their business' growth.

Bootstrapping is one of most effective and inexpensive ways to
ensure a business' positive cash flow. Bootstrapping means less
money has to be borrowed and interest costs are reduced.

Looking for ways to bootstrap your business? Trade credit is one
way to maximize your financial resources for the short term.
Normally, suppliers extend credit to regular customers for 30, 60
or 90 days, without charging interest. However, when you first
start your business, suppliers will want every order COD (cash or
check on delivery) until you've established that you can pay your
bills on time. While this is a fairly normal practice, in order to
raise money during startup, you're going to have to try to
negotiate a trade credit basis with suppliers. One of the things
that will help you in these negotiations is having a written
financial plan.

But using trade credit on a continual basis is not a long-term
solution. Your business may become heavily committed to those
suppliers who accept extended credit terms. As a result, the
business may no longer have ready access to other, more competitive
suppliers who might offer lower prices, a superior product, and/or
more reliable deliveries.

Depending on the terms available from your suppliers, the cost
of trade credit can be quite high. For example, say you make a
purchase from a supplier who decides to extend credit to you. Terms
the supplier offers are 2 percent cash discount within 10 days and
a net date of 30 days. Essentially, the supplier is saying that if
you pay within 10 days, the purchase price will be discounted by 2
percent. On the other hand, by forfeiting the 2-percent discount,
you're able to use your money for 20 more days, and it will only
cost you that 2-percent discount.

Factoring is another way to stretch your money. It involves
selling your receivables to a buyer, such as a commercial finance
company, to raise capital and is very common in industries, such as
the clothing industry, where long receivables are part of the
business cycle. Factors usually buy accounts receivable at a rate
that ranges between 75 and 90 percent of face value, and then add a
discount rate of between 2 and 6 percent. The factor assumes the
risk, and task, of collecting the receivables. If your prices are
set up to take factoring into account, you can still make a
profit.

Customers can also help you obtain financing by writing you a
letter of credit. For example, suppose you're starting a business
manufacturing industrial bags, and a large corporation has placed
an order for a steady supply of cloth bags. The major supplier that
you'll source the material through is located in India. In this
scenario, you obtain a letter of credit from your customer when the
order is placed, and the material for the bags is purchased using
this letter of credit as security.

If your business needs to buy its facility, your initial costs
may be high, but the building's cost can be financed over a
long-term period of 15 to 30 years. The loan on the facility can be
structured to make optimum use of your planned growth or seasonal
peaks. For instance, you can arrange a graduated payment mortgage
that initially has very small monthly payments with the cost
increasing over the lifetime of the loan. The lower monthly
payments give your business time to grow. Eventually, you can
refinance the loan when time and interest rates permit.

Another advantage is that real estate appreciates over time and
creates a valuable asset called equity. You can borrow against this
equity--lenders often loan up to 75 or 80 percent of a property's
appraised value. This also applies to any personal real estate you
own. Home equity loans are a popular financing device for new
business owners because there's often substantial equity tied up in
a home, and the loans are easy to come by.

If you spend a lot of money on equipment, you may find yourself
without enough working capital to keep your business going in its
first months. Instead of paying cash for your equipment, the
manufacturer can effectively loan you the money by selling you the
equipment on an installment basis. This helps conserve your working
capital while allowing you to use the equipment in your
business.

Two types of credit contracts are commonly used to finance
equipment purchases:

1. The conditional sales contract. The purchaser doesn't
receive title to the equipment until it's fully paid for.2. The chattel-mortgage contract. The equipment becomes the
property of the purchaser on delivery, but the seller holds a
mortgage claim against it until the amount specified in the
contract is paid.

Leasing is another way to avoid financing the entire purchase of
high-ticket items like equipment, vehicles, furniture, computers
and even employees. With leasing, you pay for only that portion you
use, rather than for the entire purchase price. When you're just
starting out in business, it might make sense to shop around and
get the best leasing arrangement possible. For example, you could
lease a photocopier for several hundred dollars a month rather than
financing the entire $3,000 purchase price, or you could lease your
automobile or van instead of shelling out $25,000 or more for the
full purchase price of the car.

There are many ways that a lease can be modified to increase
your cash position. These modifications include:

A down payment lower than 10 percent, or no down payment at
all.

Maintenance costs that are built into the lease package,
thereby reducing your cash outlays. If you needed employees or a
repairperson to do maintenance on purchased equipment, it would
cost you more than if you had leased it.

Extending the lease term to cover the entire life of the
property (or use of the property for as long as you wish to use
it).

A purchase option that allows you to buy the property after the
lease period has ended. A fixed purchase price can also be added to
the option provision.

Lease payments that can be structured to accommodate seasonal
variations in the business or tied to indexes that track interest
to create an adjustable lease.

Bootstrap financing really begins and ends with your attention
to careful management of your financial resources. Be aware of what
you spend and keep your overhead low. If you need to go the
top-dollar route, make sure you can justify the expense. Don't
choose an overly expensive office or location unless it's really
going to pay off in increased sales. Take a look at secondhand
furniture--if it works for your office, buy it. Barter for goods
and services when appropriate. Buy on promotion, to take advantage
of better prices offered for a limited time.

Keep a close watch on operating expenses. If interest rates are
high, it won't take too many unpaid bills to wipe out your profits.
At a 12-percent interest rate, carrying an unpaid $10,000 of bills
will cost you $120 per month. Tight margins mean it's more costly
to accumulate bills than increase production.